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UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES
STUDY SERIES No. 32
ROADBLOCK TO REFORM: THE PERSISTENCE OF AGRICULTURAL
EXPORT SUBSIDIES
by
Ralf Peters
Division on International Trade in Goods and Services, and Commodities
UNCTAD
UNITED NATIONS
New York and Geneva, 2006
ii
NOTE
The purpose of this series of studies is to analyse policy issues and to stimulate discussions in the area of international trade and development. This series includes studies by UNCTAD staff, as well as by distinguished researchers from academia. In keeping with the objective of the series, authors are encouraged to express their own views, which do not necessarily reflect the views of the United Nations.
The designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the United Nations Secretariat concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.
Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with a reference to the document number. It would be appreciated if a copy of the publication containing the quotation or reprint were sent to the UNCTAD secretariat:
Chief Trade Analysis Branch
Division on International Trade in Goods and Services, and Commodities United Nations Conference on Trade and Development
Palais des Nations CH-1211 Geneva
Series Editor: Khalilur Rahman
Chief, Trade Analysis Branch DITC/UNCTAD
UNCTAD/ITCD/TAB/33
UNITED NATIONS PUBLICATION Sales No. E.05.II.D.18 ISBN 92-1-112678-9
ISSN 1607-8291
© Copyright United Nations 2006 All rights reserved
iii
ABSTRACT
Agricultural export subsidies are one of the most distorting of the numerous distortions affecting agricultural trade, and the reluctance of users to make clear commitments for their elimination was a key factor contributing to the deadlock of the WTO negotiations on agriculture. In August 2004 the WTO General Council decided to eliminate export subsidies by a specific yet undetermined date. Export subsidies amount to around $6 billion each year, depending on world price movements. Some countries pay export subsidies in order to dispose of their surplus agricultural production on world markets. These payments impose substantial costs on taxpayers in the subsidizing countries and reduce the world prices of several temperate and competing products to the detriment of producers in developing and least developed countries. However, they also benefit consumers in food-importing countries, many of which are developing.
Quantitative analysis using the UNCTAD/FAO ATPSM model suggests that the removal of export subsidies would raise world prices. The major beneficiaries would be EU taxpayers and developing country producers. Since consumers in developing countries probably face higher prices the welfare effects are ambiguous, but most likely only during an initial period until domestic supply capacities can catch up in many of these developing countries. This is because many of them are net importers of wheat, dairy products and beef, and the cheap subsidies imports hinder the production of these products and of substitutes. Although the benefits to some of preferential access to the EU sugar market would also likely be reduced if export subsidy reform led to the reduction of EU domestic sugar prices, increasing world market prices are likely to more than offset the losses. The analysis also points to diverse results regarding specific products for producers and consumers in most countries. This suggests that while longer-term reforms of export subsidies are desirable, the immediate removal of export subsidies is likely to cause some hardships for some developing country consumers, which will need to be addressed with appropriate support mechanisms.
iv
ACKNOWLEDGEMENTS
The author thanks David Vanzetti for his invaluable advice throughout the preparation of this paper and Miho Shirotori for very helpful comments.
v
CONTENTS
1. Introduction.............................................................................................................. 1 2. Regulations and Use of Export Subsidies .............................................................. 4 Export subsidies and WTO provisions ............................................................. 4 Export subsidy budgetary outlays..................................................................... 4 Export subsidy volumes.................................................................................... 6 Commitments and negotiations ........................................................................ 7 Export credits.................................................................................................... 8 Data issues ...................................................................................................... 10 3. Economic Effects of Export Subsidies ................................................................. 11 Theoretical model ........................................................................................... 11 Effects on world prices and welfare considerations ....................................... 11 Political-economy considerations................................................................... 12 Effects of export credits.................................................................................. 13 4. Agriculture Trade Policy Proposals ..................................................................... 14 5. Simulating Export Subsidy Reductions ............................................................... 17 Export subsidy rates........................................................................................ 17 Export credits.................................................................................................. 19 How ATPSM works: EU’s beef export subsidies .......................................... 20 Modelling limitations ..................................................................................... 21 Scenarios......................................................................................................... 22 6. Results ..................................................................................................................... 24 Impact on world prices ................................................................................... 24 Consumers and producers in different country groups................................... 25 Welfare changes ............................................................................................. 26 Sectoral analysis ............................................................................................. 27 Bovine meat .................................................................................................... 28 Sugar ............................................................................................................... 29 Dairy products ................................................................................................ 30 Wheat.............................................................................................................. 30 Vegetable oil, oilseeds and tobacco................................................................ 31 7. Conclusions............................................................................................................. 32 References ........................................................................................................................ 34 Appendix ........................................................................................................................ 36 Product concordance................................................................................................ 36 The ATPSM modelling framework ......................................................................... 37 Equation system in the standard version.................................................................. 38
vi
Figures
1. Export subsidy expenditures by commodity groups .................................................. 5 2. Bound and actual export subsidy expenditure, all countries...................................... 6 3. Subsidy element amount of export credits ................................................................. 9 4. Export subsidy outlays and export credit subsidy element ...................................... 10 5. Tariffs and export subsidies as measures to raise domestic prices .......................... 11 6. Price effects of export subsidies............................................................................... 12 7. Harbinson proposal on export subsidies .................................................................. 15 8. Additional welfare gains, by commodity................................................................. 28
Tables 1. Use of export subsidies: Averages from 1995 to 2000 by country............................ 5 2. Export subsidy utilization in selected countries ........................................................ 7 3. The impact of export subsidy elimination on the EU beef market .......................... 21 4. Alternative liberalization scenarios ......................................................................... 22 5. Consumer surplus impacts resulting from export subsidies reductions................... 25 6. Producer surplus impacts resulting from export subsidies reductions..................... 25 7. Export revenue change impacts ............................................................................... 26 8. Welfare impacts ....................................................................................................... 27 9. Additional welfare gains from eliminating export subsidies on bovine meat ......... 29 10. Additional welfare gains from eliminating export subsidies on sugar .................... 30 11. Additional welfare gains from eliminating export subsidies on dairy products ...... 30 12. Additional welfare gains from eliminating export subsidies on wheat ................... 31 13. Additional welfare gains from eliminating export subsidies on vegetable oil, oilseeds and tobacco ................................................................................................ 31
Boxes
1. Export subsidies ......................................................................................................... 4 2. Canadian export subsidies in dispute......................................................................... 8 3. Prices in ATPSM ..................................................................................................... 18
1
The commitment to el iminateagricultural export subsidies by a specific date,although subject to negotiations, is consideredto be the major achievement of the WTOGeneral Council Decision in August 2004. Theframework agreement provides for a parallelelimination of all elements and practices ofexport subsidization, including scheduledexport subsidies and distorting elements inexport credits, State trading enterprises andfood aid. Such subsidies are often regarded asan unfair means of support that distortsinternational markets (particularly since theyare prohibited for non-agricultural products)and imposes an unreasonable burden on thirdcountry producers, many of whom are indeveloping or least developed countries. Assuch, they represented for a long time aroadblock to a successful outcome in thecurrent WTO trade negotiations.
A new round of negotiations waslaunched in 2001 as part of the “built-inagenda” decided at the end of the UruguayRound. While considerable progress has beenmade in clarifying issues, several deadlines havebeen missed and export subsidies were one ofthe key elements behind the failure of theWTO Ministerial Conference in Cancún in late2003 already. The current WTO workprogramme, decided at Doha in 2001, coversagriculture, non-agriculture market access,services, dispute settlement and other fields.Most of the negotiations were supposed to befinished as a single undertaking in January2005. Negotiations on agriculture are among
the most difficult, centring on three mainpillars — market access, domestic support andexport subsidies — although there are otherrelated issues, including TBT/SPS measures.In this paper an analysis of costs and benefitsfor developed and developing countriesresulting from an elimination of agriculturalexport subsidies is provided. Elimination ofsubsidies was agreed in the General CouncilDecision in 2004 (WTO, 2004), albeit withouta specific deadline. The computable partialequil ibrium model ATPSM1 is used todetermine the likely economic effects ofeliminating export subsidies and export creditsubsidy elements by country and commodity.
Some countries pay export subsidies inorder to dispose of their surplus agriculturalproduction on world markets. This surplusproduction is often stimulated by domesticsupports and high import tariffs. The averageannual amount of notified export subsidiesbetween 1995 and 2000 was $6.2 billion. TheEuropean Union is by far the largest providerof these export subsidies. Export credits,whose use has been expanding in recent years,may also distort export competition where thecredit conditions go beyond what privatearrangements could achieve. In thisconnection, the United States is the largestprovider.
Export subsidies are often consideredto be the most distorting of the three pillars.The subsidizing of exports increasesproduction and therefore decreases world
1. INTRODUCTION
1 The Agricultural Trade Policy Simulation Model ATPSM was developed by UNCTAD in collaboration with FAO.UNCTAD acknowledges financial support from the United Kingdom’s Department for International Developmentfor the development of the model and software system for its exploitation.
2
market prices. This has drawbacks forproducers in non-subsidizing countries.2
Developing countries generally cannot affordto pay export subsidies, and thus lose someof their export competitiveness relative todeveloped countries. Consumers, however,gain in general from the policy of subsidizingexports so long as they are not taxpayers insubsidizing countries.
In the Uruguay Round member Statesagreed to cap and reduce export subsidies foragriculture. However, the permitted amountis still considerable and most developingcountries and agricultural exporters want themto be eliminated. So far there is no WTOagreement that disciplines the use of exportcredits or limits the subsidy elements in theseloans. At the Doha Ministerial Conference in2001 ministers agreed to a “reduction of, witha view to phasing out, all forms of exportsubsidies”. In subsequent negotiations manydeveloping countries have demanded a totalelimination of export subsidies. Members ofthe G20, a heterogeneous group of developingcountries formed shortly before the CancúnMinisterial Conference, have taken a strongposition on this issue. In addition, most leastdeveloped and even net food-importingcountries (apparently taking the view that theirown, currently limited, agricultural productionwould benefit) also want export subsidieseliminated.
On the other hand, it was only in 2004that the European Commission indicated thatthe European Union would be ready toeliminate all export subsidies if other countriesdid the same. This offer is conditional on othermembers’ removing State trading enterprisesand export credits with subsidy components(“parallelism”), on an acceptable outcomeemerging with regard to market access anddomestic support, and on the EU’s non-trade
concerns being taken into account. The offercontributed to achieving agreement on aframework for modalities, which provides forthe elimination of export subsidies by a certaindate.
Despite the importance attached to theelimination of export subsidies by mostdeveloping countries and the Cairns Group,several studies have shown that the impact ofreducing export subsidies is smaller than thatof a reduction of import tariffs. TheEconomic Research Service of the USDepartment of Agriculture (USDA) (2001)estimates that export subsidies account for 13per cent of market distortions in agriculture,compared with 52 per cent accounted for bytariffs and 31 per cent by domestic support.The OECD (2000) finds that the results ofexport subsidy elimination are fairly modest.World dairy prices would increase, but effectson world crop prices would be limited. This,however, depends on the assumptions madeconcerning movements in world food prices.Increasing world prices reduces the necessaryexpenditure on subsidies. Hoekman et al.(2003) concluded from their analysis that a 50per cent reduction in border protection forsubsidized products would have a greaterpositive impact on developing countries’exports and imports than a comparablereduction in agricultural subsidies.
Our analysis roughly confirms thesefindings on the relative importance of tariffsand subsidies. One reason is that while exportsubsidies are about $6 billion, global tariffrevenue from agricultural products is in theorder of $36 billion. However, since it is likelythat WTO members will agree on moreambitious reductions concerning exportsubsidies than concerning import tariffs theaggregate impact of export subsidy reductionsmay be considerable. Global annual welfare
2 There are many examples that demonstrate this linkage. Oxfam (2002), for example, reports that “In Jamaica,trade liberalisation in the early 1990s resulted in the substitution of locally produced fresh milk by subsidisedEuropean milk powder as the major input for the Jamaican dairy industry. … these exports dominated the smallJamaican dairy market, with devastating consequences for local producers” (p. 116).
3
gains resulting from a total elimination areestimated at $4.3 billion, which compares withgains of about $9.5 billion from reducingimport tariffs applying the Uruguay Roundformula. The Austral ian Bureau ofAgricultural and Resource Economics(ABARE, 2001) puts gains from an eliminationof export subsidies at $3.6 billion, in the sameorder of magnitude.
Major winners are producers inagricultural exporting countries such ascompetit ive Cairns Group members,producers in other developing countries andconsumers and taxpayers in developedcountries. Another advantage of eliminatingexport subsidies not captured by the staticmodels that have been used is a l ikelystabilization effect. It can be expected that theprice fluctuations would be reduced, as moreadjustment would occur in the subsidizingcountries and less would be pushed on to theresidual world market. However, consumers indeveloping countries and even in Cairns Groupexporters would have to pay higher food pricesunless they also have an option of makingcorresponding tariff reductions to offset theexpected increase in world prices.
Since in developing countries a largeproportion of the population depends on theagricultural sector and the share of income thatis spent on food is relatively higher indeveloping and least developed countries,quantitative analysis of this sector is extremelyimportant for these countries. Our resultsindicate that in many net food-importingdeveloping countries the supply capacity wouldhave to be increased in order to adequatelyrespond to the expected increase ininternational prices – however modest – asexport subsidies are reduced. Laird et al. (2003)show similar results.
The recent proposals to eliminate firstexport subsidies for products of specificinterest to developing countries call for a look
at single commodities. Impacts differ greatlyfor different commodities. Extreme examplesare sugar and wheat. Whereas developingcountries as a group greatly benefit from theelimination of sugar subsidies, the eliminationof wheat subsidies is expected to cause somehardships for consumers, at least during anadjustment period.
However, apart from these directeconomic effects, the total elimination ofexport subsidies may have another positiveeffect since many developing countriesmaintain high import tariffs in order to protecttheir farmers against cheap subsidized importsfrom developed countries. As shown byAnderson (2004) and others, developingcountries would benefit from liberalizing theirown markets and the elimination of exportsubsidies would make this more feasiblewithout costly adjustments. Furthermore, areinforcement of the rural population, whichdepends heavily on agricultural production andis in general disproportionately poor, maycontribute to poverty alleviation. Exportsubsidies can distor t local markets indeveloping countries, causing harmful effectsfor small agricultural producers and foodsecurity. This, however, depends on specificcountry conditions, which are not furtherexamined here.
In this paper, section 2 provides anoverview of the current use and ceiling levelsof export subsidies. Section 3 describes thetheoretical economic effects of expor tsubsidies. Section 4 describes how theAgricultural Trade Policy Simulation Modelsimulates export subsidies. In section 5 therecent proposals concerning export subsidiesare discussed. In section 6 the results of areduction of export subsidies are outlined.Section 7 concludes with implications andlimitations and a discussion on how exportsubsidy policies are linked to the “developmentbenchmarks” which were developed byUNCTAD.
4
Export subsidies and WTO provisions
In the years leading up to the UruguayRound export subsidies proliferated. TheUruguay Round Agreement on Agriculture(URAA) imposed disciplines on agriculturalexport subsidies for the first time. Countriesthat used agricultural export subsidies agreedto evaluate, declare and reduce them, accordingto negotiated modalities. Of the current 148WTO members, 25 countries have exportsubsidy commitments for various groups ofproducts.3 The commitments involve bothvolume and budgetary outlay constraints.Developed countries committed themselves toreducing subsidized exports by 21 per cent involume and 36 per cent in value by the year2001. For developing countries thecorresponding numbers are 14 per cent and24 per cent, respectively, and reductions hadto be completed by 2004. New subsidiescannot be introduced.
However, the URAA allowed specialand differential treatment export subsidies indeveloping countries (e.g. marketing costs,internal transport and freight charges), exportcredits with a subsidy component and exportsubsidies related to international food aid.Least developed countries are exempt from anycommitments.
Export subsidy budgetary outlays
The budgetary outlay constraint for all25 subsidizing countries was almost $11 billionin 2000. The level of export subsidies actuallyprovided depends on production, exchange
rates and world food prices, and thereforefluctuates. Subsidies are counter-cyclical,expanding when world prices fall and viceversa. During the period from 1995 to 2000on average $6.2 billion was spent annually onexport subsidies by WTO members. TheEuropean Union is by far the largest user ofexport subsidies, accounting for almost 90 percent of expenditures (see table 1). On averagethe EU spent $5.5 billion each year between1995 and 2000. However, the latest availabledata for the EU show a distinct decline in itsuse of export subsidies. In the marketing years2000/01 and 2001/02 budgetary outlaysdeclined to $2.5 and $2.3 billion, respectively.
Since most of the export subsidies areprovided by developed countries from thenorthern hemisphere, the bulk of subsidies arefor temperate products. Almost 35 per cent isfor dairy products and 23 per cent is for meat(see figure 1). Producers of cereals,incorporated products and sugar also receivea considerable amount. Beef, which is ofexport interest to some developing countries,makes up almost 60 per cent of all meatsubsidies.
2. REGULATIONS AND USE OF EXPORT SUBSIDIES
Box 1. Export subsidies
Any payments contingent on ex-ports, producer-financed export subsidies,export marketing subsidies, export-specifictransportation subsidies, and subsidies ongoods incorporated into exports (Agreementon Agriculture Article 9).
3 These are the countries which had export subsidies during the Uruguay Round base period.
5
Table 1. Use of export subsidies: Averages from 1995 to 2000 by country
Average Average1995–2000 1995–2000(Million $) % (Million $) %
EU 5 503.4 88.7 Israel 6.6 0.1Switzerland 311.5 5.0 Mexico 3.8 0.1Norway 85.7 1.4 Cyprus 2.9 0.0USA 83.6 1.3 Australia 0.6 0.0Canada* 54.5 0.9 Iceland 0.0 0.0Czech Republic 37.1 0.6 New Zealand 0.0 0.0Turkey 28.4 0.5 Romania 0.0 0.0Poland 21.7 0.3 Bulgaria 0 0South Africa 18.6 0.3 Brazil 0 0Hungary 16.9 0.3 Indonesia 0 0Colombia 12.8 0.2 Panama 0 0Slovak Republic 10.8 0.2 Uruguay 0 0Venezuela 7.8 0.1
Total 6 206.7 100
Source: UNCTAD calculation based on WTO notifications.* See assumptions in the text.
Source: UNCTAD calculation based on WTO notifications, averages 1995–2000 in million $.
Figure 1. Export subsidy expenditures by commodity groups
2 106
1 425
900 750
606
210 120 90
0
500
1 000
1 500
2 000
2 500
Mill
ion
$
Dairy Meat Cereals Inc. prod. Sugar Alcohol Fruit, veg. Otherprod.
6
The utilization rate of the averagesubsidy expenditures between 1995 and 2000concerning the final 2000 commitment valueof $11 billion is 59 per cent. Since this iscalculated using the average annualexpenditure of $6.2 billion, there is a great dealof variation, both between countries andbetween products. Some countries that wereallowed to subsidize their exports did not doso at all, whereas other countries took fulladvantage. For example, Norway’s utilizationrate is 153 per cent, Switzerland’s 119 per cent,the European Union’s 80 per cent and theUnited States’ 14 per cent.4 Bulgaria, Brazil,Indonesia, Panama and Uruguay notified niluse. The variation concerning differentproducts is discussed below.
Export subsidy volumes
When the actually subsidized volumesand expenditures between 1995 and 2000 arecompared with the f inal volume andexpenditure constraints, respectively, it is seenthat the volume constraint is likely to be lessrestrictive in the future than the expenditureconstraint.5 For each product category exceptincorporated products the average subsidizedvolume between 1995 and 2000 has beencalculated and compared with the final 2000commitment. This utilization rate variesbetween zero (rapeseed) and 124 (poultrymeat) in the EU. The average is 81 per centfor the EU, 74 per cent for Norway, 70 percent for Switzerland and 26 per cent (excludingother milk products) for the United States.6Variations concerning different products areconsiderable.
Figure 2. Bound and actual export subsidy expenditure, all countries
Source: UNCTAD calculations based on WTO notifications.
4 This rate is the average of actual subsidies between 1995 and 2000 divided by the 2000 commitment value,summed over all products. Since commitment values decreased during that period the rate may be higher than 100per cent. The average utilization rate, where this rate is calculated for each year and each product, is smaller (seebelow). However, using the year 2000 commitment levels shows whether countries are currently, or will in the nearfuture be, constrained rather than whether they were constrained in the past.
5 This is not in contradiction with the observation of many analysts that in the past, the volume constraint has beenmore restrictive. The value constraint had higher reduction rates than the volume constraint and therefore the finalvalue constraint is more restrictive than the value constraints during the implementation period.
6 This rate is the simple average of the utilization rate concerning the 2000 commitment values for each productcategory. Data limitations preclude a more accurate calculation.
0
5
10
15
20
25
1995 1996 1997 1998 1999 2000
year
Bill
ion
$ actual values
bound levels
final commitment
7
Commitments and negotiations
In the EU in particular, subsidizedvolumes of coarse grains, rice, other milkproducts, poultry meat, wine and fresh fruitand vegetables are up against their constraints.Taking the average subsidized volumesbetween 1995 and 2000, any new agreementrequiring reductions of more than 10 per centwould be binding for these products.Budgetary expenditure commitments of theEU are especially restrictive for sugar, alcohol,incorporated products and other milkproducts. Since for some products the valueconstraints and for others the volumeconstraints are more likely to be binding, bothcommitments seem to be important in orderto limit export subsidization. In general,volume commitments in the EU have been
more binding than value commitments duringthe implementation period (see also Leetmaa,2001). The average of the utilization ratescalculated for each single product in each yearbetween 1995 and 2000 is 74 per centconcerning volume and 54 per cent concerningvalue constraints.
In countries other than the EU as well,subsidies for selected products are up againsttheir commitments. Table 2 shows utilizationrates by value and volume by product group.Because countries have a different totalnumber of product-specific commitments therelative number of product groups for whichthe utilization rate is higher that 90 per cent isalso shown. Therefore, even small reductionsin commitments in a new agreement onagriculture would probably impact on the
Table 2. Export subsidy utilization in selected countries
Note: The average utilization rate of value is calculated from the average expenditures during 1995 and 2000 across allcommodities and the 2000 commitment level. The average utilization rate of volumes is the average across commodities of theaverage utilization rate calculated from the subsidized volume between 1995 and 2000 and the final 2000 volume commitmentlevel for each commodity. The US averages exclude other milk products.
Value Volume
Aver
age
ut
ilizat
ion
ra
te
Products where utilization rate is higher than 90%
Percentage of product groups where utilisation rate is higher than 90% Av
erag
e
utilis
atio
n
rate
Products where utilization rate is higher than 90%
Percentage of product groups where utilization rate is higher than 90%
EU
80
Rice, sugar, other milk products, wine, alcohol, incorporated products 30 81
Coarse grain, rice, sugar, cheese, other milk products, beef meat, pigmeat, poultry meat, eggs, wine, fresh fruit and vegetables 58
Nor
way
153
Bovine meat, eggs and egg products, cheese, whey powder 36 74
Bovine meat, eggs and egg products, cheese, whey powder 40
US
14 Cheese, other milk products 15 26
Skimmed milk powder, other milk products, cheese 23
Sw
itzer
land
119 Dairy products, incorporated products 40 70 Dairy products 25
8
provision of export subsidies. In countriesother than the four major export subsidyproviders the average utilization rate is smaller,but also in these countries subsidy measuresfor a few single commodities are close to thecorresponding commitments.7
The EU’s average subsidy valuesbetween 1995 and 2000 were $5.5 billion, only20 per cent lower than its final boundexpenditure level of $6.8 billion. But in 2000and 2001, outlays decreased to $2.5 and $2.3billion, respectively, and could thereforeaccommodate a reduction of more than 60 percent in the total expenditure. However, as isthe case for the 1995–2000 averages, a numberof individual commodities, including rice,sugar, incorporated products, wine and fruitand vegetables, are currently close to theirexpenditure or volume constraints.8
Export credits
In the WTO Agreement onAgriculture, signatory countries agreed to“work towards the development ofinternationally agreed disciplines to govern theprovision of export credits, export creditguarantees on insurance programmes”. As yet,no such WTO agreement has been negotiatedto discipline the use of export credits or tolimit subsidy elements in these loans in theagricultural sector.
Official data on export credits and theassociated conditions are not available. Thereis no obligation for WTO members to notifythe extent of officially supported exportcredits for agricultural products and theassociated conditions. However, the WTOsecretariat invited members to provide
Box 2. Canadian export subsidies in dispute
Canada notified the WTO of very little or nil use of export subsidies in the second half ofthe 1990s. The United States and other WTO members, however, complained about Canada’s dairyregime. It was claimed that it infringed the Agreement on Agriculture. The Canadian Governmentsecured an artificially high price level for domestically sold dairy products by a complex system offederal and local Dairy Management Boards. Prices for exports were kept at a lower level. Thedispute unfolded in three judicial stages. In the original dispute settlement the Appellate Body fol-lowed the valuation of the Dispute Settlement Body, which agreed with the complainant’s positionthat Canada’s export subsidies were inconsistent with its WTO obligations. Canada then changed itspolicy. However, the Appellate Body found during the second compliance panel that Canada’s com-mercial export milk practices constituted export subsidies. Specifically, they found that producerswere selling milk at prices below their cost of production – that is, “payments” were being provided– and that government actions regulating the domestic market had the effect of financing thesepayments. It is not possible to calculate the exact subsidy component of this policy. In this paper,we have assumed for the purposes of further analysis that Canada’s annual export subsidy values fordairy products equal their final commitment value. This is $54.5 million.
7 The average utilization rate concerning the average export subsidy value and the final 2000 commitment level is inAustralia 1 per cent, Canada 19, Colombia 4, Cyprus 17, the Czech Republic 33, Hungary 33, Iceland 7, Israel 14,Mexico 0.4, Poland 4, Romania 1, Slovakia 30, South Africa 23, Turkey 6 and Venezuela 17 per cent.
8 For each of these products the utilization rate in 2001/2002 concerning either volumes or values, or both, ishigher than 90 per cent of the corresponding commitment.
9
information concerning export credits, andthey received information from Chile, theCzech Republic, Estonia, Japan, Maldives, NewZealand, the Republic of Korea, Slovenia,Switzerland and Zimbabwe. Except for theCzech Republic, the responses were nil usereturns. Canada, the European Union and theUnited States have provided information onthe value of exports of agricultural productsthat benefited from officially supported exportcredits. The data do not reflect the subsidycomponent for these exports.
The OECD (2000) analysed officiallysupported export credits in agriculture usingconfidential data that were provided byparticipants in the Export Credit Arrangementat the OECD. The study undertook anevaluation of the degree to which officiallysupported export credits have a subsidyelement and distort world markets. If, forexample, the interest rate is below the normalmarket rate or the length of time exceeds whatthe market would offer, the export credit mayhave a trade-diverting effect since the decisionof an importer may be made because of thefinancial appeal of the export credit. The
OECD calculated the difference between theofficially offered export credit and thepotential credit, which would otherwise havebeen provided by the market.
The result of this OECD study is thatthe overall trade-distorting effect of exportcredits in total trade of agriculture productsis very small, although certain export creditprogrammes do bias targeted importers’purchasing decisions and do distort markets.Total export credits facilitated on average 4.4per cent of world trade between 1995 and1998, but of these, only a portion are estimatedto have distortionary effects. The use of exportsubsidies was increasing during this period,both in total and relative to total trade. Thetotal subsidy element amount is estimated tohave been $300 million in 1998. Of this, theUnited States provides 86 per cent, the EU 7per cent (excluding intra-EU credits), Canada5 per cent and Australia 2 per cent (see figure3). The United States is the largest user ofexport credits, and its export credits have at6.6 per cent the highest subsidy content.Cereals account for almost one half of thesubsidy element of all export subsidies used.
Source: OECD (2000); EU data excluding intra-EU export subsidies.
Figure 3. Subsidy element amount of export credits
258
19.6 13.6 5.1 0.1
0
50
100
150
200
250
300
Mill
ion
$
US EU Canada Australia Rep. of Korea
10
Figure 4 shows the expenditure perproduct for selected products.
Data issues
The data shown on export subsidies areofficial subsidies under Article 9 of the WTOAgreement on Agriculture. De Gorter (2004)argues that this definition is inadequate.Consumer-financed export subsidies, forexample, are not limited under the Agreementon Agriculture. Such a subsidy occurs whenprice discrimination and the pooling ofrevenue expand output and contract domesticconsumption, causing a gap between world anddomestic prices. De Gorter gives the examplesof milk in the United States and wheat inCanada, where a government policy or asanctioned monopoly producer organizationallows for such a gap.
Domestic support measures, even ifdecoupled, may allow farmers to cover theirfixed costs so that a smaller export revenuecovering the variable costs only is sufficient.Thus, this kind of support can also beconsidered to subsidize exports. Cotton is a
good example since it receives almost noexport subsidies. The domestic supportprovided by the United States for exampledoes, however, impact on export competition.The WTO dispute settlement panel has judgedthat the US cotton support of up to more than$3 billion depresses world prices and violatesWTO rules. The panel found that the UnitesStates used hidden expor t subsidies tocircumvent its WTO commitment to reduceexport subsidies. In a similar case against theEU, the WTO ruled that Europe’s subsidizedsugar exports are higher than the permittedamount. The EU claimed that there are nosubsidies attached to the controversial non-quota or “C” sugar exports, but the panelfound that they are in fact cross-subsidized bythe high guaranteed prices paid for quota sugar.
Official export subsidies are small andshrinking compared with domestic supportmeasures. However, it is almost impossible toassess the export subsidy component of allother policies and we therefore consider theofficial data only. This limitation, however, hasto be borne in mind when interpreting theresults.
Figure 4. Export subsidy outlays and export credit subsidy element
Source: ATPSM database.
1 023
815
538 506 482 395
292 176
99 77 43 136
0
200
400
600
800
1 000
1 200
Mill
ion
$
Milk Bovinemeat
Cheese Barley Sugar Wheat Butter Pigmeat Poultry Maize Rice Others
11
Theoretical model
The interaction of tariffs and exportsubsidies and their distorting impact onconsumption and production within onecountry are demonstrated in a simplified staticmodel. The impact on world prices is shownin a similar model with supply and net importfunctions.9
We assume that in the absence of anyprotection measures a country would be animporter of a specific product at the worldprice Pw. In figure 5 the imports are Q3 - Q2.The country wants to support its producersby ensuring a higher domestic price PD. Torestrict the competition from imports itimposes a tariff T = PD - Pw. Internal pricescannot, however, increase above the price atwhich the country becomes fully selfsufficient, PS, without additional measures. Thesupply at PD, Q4, would exceed the demand Q1and excess supply could not be sold on world
markets at this high price. The differencebetween the domestic price and the world priceis covered by an export subsidy. Looked atanother way, in order to raise the domesticprice sufficiently a tariff or similar quantitativerestriction is necessary in order to preventimports from being re-exported with theassistance of the export subsidy. The exportsubsidy is necessary for disposing of thesurplus.
Effects on world prices and welfareconsiderations
The EU provides almost 90 per centof all export subsidies. It is therefore helpfulto look at a theoretical model where one singlelarge country provides all the export subsidies.Gaisford and Kerr (2001) consider thissituation in a simple partial equilibrium model.The domestic price for a specific commodityin the export-subsidy-providing country is PD=Pw+S, where Pw is the world price and S theper-unit export subsidy. Exports of thiscountry are an increasing function of itsdomestic price, X=x(Pw+S), x’>0. It isassumed that the rest of the world is passivefrom a policy standpoint and that the subsidy-providing country is large enough to influencethe world price. The net imports of the restof the world as a whole are a decreasingfunction of the world price, M=m(Pw), m’<0.The equilibrium condition for the worldmarket requires that global imports equalsglobal exports:
x(Pw+S)= m(Pw).
3. ECONOMIC EFFECTS OFEXPORT SUBSIDIES
Price
Quantity
Demand
Supply PD
PS Pw
Q1 Q2 Q3 Q4
Figure 5. Tariffs and export subsidies asmeasures to raise domestic prices
9 The first model is partly based on ABARE (2003) and the second one on Gaisford and Kerr (2001).
12
This implies that as the export subsidyis increased the world price falls and thedomestic price in the export subsidizingcountry rises.10 Figure 6 shows how an exportsubsidy of a large country impacts on pricesand quantities. In the absence of subsidies theequilibrium world price would be Pw1. With asubsidy of S the domestic prices increase toPD and the world price falls to Pw2. Thus, anexport subsidy has a terms-of-trade effect.
Figure 6. Price effects of exportsubsidies
As a consequence of an export subsidy,domestic prices rise and hence the consumersurplus in the subsidizing country is reducedwhile the producer surplus increases. However,since the country faces tax outlays the overallwelfare effect is negative.11 The rest of theworld experiences lower world market pricesand hence their total welfare effect from thesubsidy is positive. Subsidies are effectively atransfer from taxpayers to domestic producers,but some of the benefits are captured byforeign consumers. However, foreignproducers of the subsidized product are worseoff. Because of the induced overtrading, thereis an overall efficiency loss.
Political-economy considerations
In the aftermath of the Second WorldWar many Governments were concerned toincrease agricultural production for foodsecurity reasons and to achieve a certainbalance between the development of rural andurban incomes.12 In the developed world inparticular, countries resorted to domesticsupport measures and administratively raisedfarm prices. Import barriers were required toensure that domestic production couldcontinue to be sold at prices higher than worldlevels without being undermined bycompetition from potential exporters. Inresponse to these production-encouragingmeasures and as a consequence of distinctproductivity gains, self-sufficiency ratesincreased and in some cases structuralsurpluses occurred. Export subsidies wereincreasingly used to dispose of surplus supplyonto world markets. These export subsidiesunderpin the excess production andsignificantly distort agricultural trade.
The global welfare effect of an exportsubsidy is negative. Gains to producers insubsidizing and consumers in non-subsidizingcountries are outweighed by losses toconsumers and taxpayers in the subsidizing andproducers in non-subsidizing countries. Thus,the driving force behind export subsidies isprobably the benefits to farmers, agro-businesses and input suppliers. IfGovernments weigh heavily the welfare oftheir export sectors, subsidies can appear tobe a rational policy, if not the best way ofachieving the objective of supporting low-income producers.
Export subsidies lower world prices tothe benefit of food importing countries. Why
Price
Quantity
x(PD)
m(Pw)
S PD Pw1 Pw2
10 Change of world price: /( ) 0WP x x m′ ′ ′ ′= − − < and domestic price: /( ) 0DP m x m′ ′ ′ ′= − − < .11 Export subsidies may be welfare-enhancing under specific conditions that result in an increase in the world priceor export quantity, as illustrated by Brander and Spencer (1984). However, these conditions are unlikely to hold inthe agricultural sector. (For a formal game-theoretic model see Gaisford and Kerr, 2001.)12 See also WTO (2000).
13
then do other countries complain if thesubsidy-providing countries transfer welfare tothem? There are two main reasons. Firstly,countries are not homogeneous. While netimporting countries experience overall welfaregains net exporters experience overall losses.Secondly, whether or not a country is a netimporter or exporter, producers always sufferfrom the decline in the world market price. Thelatter reasoning seems to be important forunderstanding positions in the current roundof negotiations on agriculture. In addition tothe greater emphasis that Governments seemto place on producer surplus as opposed toconsumer surplus, negotiators hope that onceexport subsidies and domestic support areeliminated their countries may themselvesbecome exporters of certain products. In fact,since world prices would increase, imports indeveloping countries are likely to fall, whereasthe production would increase. This wouldreduce the dependence on food imports andprobably have a stabil izing effect.Furthermore, a reduction would abate theadverse distributional effect that exportsubsidies have in many developing countries,where the rural population tends to be poorerthan urban consumers.
Since subsidizing countries may findthemselves in a prisoners’ dilemma situation,where they would be better off if theycooperated and agreed to remove exportsubsidies, there may be a good reason to deferto the pressure from developing countries.
Effects of export credits
Export credits, even with a subsidyelement, would not be trade-distorting if theyprovide for appropriate additional trade.Export credits may enable importers lackingcredit to buy commodities where theyotherwise would not be able to do so. However,according to a OECD (2000) study only 9 per
cent of export credits are granted to net food-importing developing countries and 0.2 percent to less developed countries.13 More than50 per cent of the export credits are receivedby OECD importers. The low shares of exportcredits that are given to net food-importingor less developed countries call into questionthe justification for export credits as help forcountries facing liquidity constraints topurchase food where they otherwise could not.
The effect on decision-makingdetermines the impact on markets. If an exportcredit programme reduces an importer’s totalcost because of non-market equivalent creditconditions and if the importer would also inthe absence of this programme buy at least acertain proportion, the credit programme hasan influence on the decision and hence it istrade-distorting. The export credit subsidyelement drives a wedge between importer costsand exporter revenue. Both parties benefitfrom the subsidy element relative to the worldmarket price. However, like export subsidies,export credits with non-market equivalentconditions hurt competing producers who arenot included in export credit programmes, andtherefore many countries complain about theseprogrammes and cal l for appropriaterestrictions.
The fact, however, that some of thepoorest in the world nevertheless benefit fromexport credits adds to the complexity of thisissue in the negotiations on agriculture.
The theoretical evidence discussed insection 3 suggests that developing countriesboth gain and lose from export subsidies andsubsidy components in export credits. It istherefore surprising that most of the reformproposals from developing countries call forsubstantial reductions or elimination. This isdiscussed next.
13 For about 7 per cent of the data no importers could be identified.
14
The Agreement on Agriculture, whichcame into force at the end of the UruguayRound in 1995, was a first step towardsmeaningful disciplines on agricultural exportsubsidies. However, there is still much scopefor the provision of export subsidies and asshown above this scope has been extensivelyused during the past decade. Thus, furtherrestriction for export subsidies are still on theagenda. At the Ministerial Conference in Dohain 2001, ministers agreed to aim at “reductionsof, with a view to phasing out, all forms ofexport subsidies”. At the MinisterialConference in 2003 WTO ministers couldagree neither on modalit ies nor on aframework for modalities. Among the majorcontroversial subjects was agriculture andwithin this area export subsidies. In August2004 the General Council adopted aframework proposal (WTO, 2004) thatprovides for the elimination of exportsubsidies by a certain date that has to benegotiated.
Before the agreement Governmentsrevealed their preferences concerning exportsubsidies. The early EU proposal (EC, 2002)states:
“An average substantial cut in the volumeof export subsidies and an average 45% cutin the level of budgetary outlays, on thecondit ion that al l for ms of expor tsubsidisation are treated on an equal footing.... The EU is ready to eliminate exportsubsidies completely for certain key productsfor developing countries, such as wheat,oilseeds, olive oil and tobacco ... The tradedistorting elements of export credits foragricultural products used by other WTOmembers should be identified and subjectedto strict discipline.”
This offer had limited value since thelisted products account for only 6.5 per centof the EU’s export subsidies during 1995 and2000. Only for wheat exports is a considerableamount – $328 million – provided on average,accounting for 81 per cent and 22 per cent ofthe final 2000 commitment levels concerningvolumes and values, respectively. For theremaining three products EU export subsidiesare negligible.
In May 2004 the EuropeanCommission offered to eliminate all exportsubsidies, conditional on other outcomes.
The early US proposal (USDA, 2002) was
“To reduce to zero the levels of scheduledbudgetary outlays and quantitycommitments on export subsidies throughreduction commitments made in equalannual instalments over a five-year period.... WTO members should develop disciplinesfor officially supported export credit, creditguarantee, loan and insurance programs.”
This was stricter than the early EUproposal concerning export subsidies but lessstrict concerning export credits, which reflectsthe use in the United States of these twoinstruments. The United States uses fewerexport subsidies (bound level $0.6 billion) thanthe EU (bound level $6.9 billion) but makesmore use of export credits.
4. AGRICULTURE TRADE POLICY PROPOSALS
15
The Cairns Group has always been a“hardliner” concerning export competition. Itproposed (Cairns Group, 2000) as follows:14
“WTO Members agree to the eliminationand prohibition of all forms of exportsubsidies for all agricultural products.”
Figure 7. Harbinson proposal on exportsubsidies
The two lines in both figures are intended to reflect 50 percent of the budgetary outlays, respectively.
The former Chair of the WTOCommittee on Agriculture, Special Session,Mr. Harbinson, proposed that export subsidiesbe eliminated. He proposed a formula bywhich the budgetary outlay and quantityreduction commitments would be determined.Figure 7 shows the phasing-out of allowed
budgetar y outlays for developed anddeveloping countries. A set of productsrepresenting at least 50 per cent of boundlevels of budgetary outlays would have to bereduced and eliminated earlier. Selecting theset of products is a matter for each country.
In the draft Cancún text, the WTOGeneral Council adopted the EC-US approach(EC and US, 2003), namely to eliminate exportsubsidies for as yet unspecified products thatare of particular interest to developingcountries, and to reduce export subsidies forthe remaining products, but with a view toeventually phasing out all export subsidies andtrade-distorting elements of export credits.15
Most developing countries, including theGroup of 20,16 were seeking the eliminationof all forms of export subsidies as an outcomein the current negotiations. The G-20 proposalwas to eliminate export subsidies for productsof specific interest to developing countriesfirst and in a second step to eliminate themfor all other products.
The products of specific interest todeveloping countries have not been specified.The early EU proposal mentions wheat,oi lseeds, ol ive oil and tobacco. Sincedeveloping countries are not a homogeneousgroup it is difficult to identify products ofspecific interest to developing countries as awhole. Furthermore, at least two approachesare possible in identifying these products. Oneis to look at the demand side and the secondis to look at export competition. On thedemand side, wheat is a candidate since all leastdeveloped countries and the vast majority ofdeveloping countries are net importers ofwheat. On the export competition side, bovinemeat and sugar are possible product groups.
Developed countries
020406080
100120
0 2 4 6 8 10 12
Year
Allo
wed
exp
ort
subs
idie
s
Developing countries
020406080
100120
0 2 4 6 8 10 12Year
Allo
wed
exp
ort
subs
idie
s
14 Several other proposals containing positions on export subsidies and competition were submitted duringnegotiations. For a list see WTO (2002).
15 Agreed disciplines on export credits would address appropriate provisions for differential treatment in favour ofleast developed and net food-importing developing countries.
16 The Group of 20 is a group of developing countries led by Brazil, China and India, which was formed prior to theCancún Conference in 2003.
16
Many developing countries could move intothe production of beef and many can producecane sugar, a substitute for beet sugar. Sincemost of the budgetary outlay is on dairyproducts, this might also be of specific interestto developing countries.
The General Council ag reed toeliminate by an end date to be agreed:
• Scheduled export subsidies;
• Export credits not in accordance withcertain disciplines (partly) to be agreed;
• Trade-distorting practices with respectto State trading enterprises;
• Food aid not in confor mity withdisciplines to be agreed.
Developing countries will benefit fromlonger implementation periods and willcontinue to benefit from special anddifferential treatment that allows them theprovision of certain export subsidies within areasonable period. Furthermore, State tradingenterprises in developing countries thatpreserve consumer and ensure food securitywil l receive special consideration formaintaining monopoly status. Disciplines onexport credits will make appropriate provisionsfor least developed and net food-importingdeveloping countries.
17
UNCTAD’s Agricultural Trade PolicySimulation Model (ATPSM) is used to estimatethe potential impact of reducing or eliminatingexport subsidies on the agricultural sector.17
The static, par tial-equil ibrium, global ,agricultural-trade model is able to estimate theeconomic effects of changes in within-quota,applied and out-quota tariffs, import quotas,export subsidies and domestic support onproduction, consumption, prices, trade flows,trade revenues, quota rents, producer andconsumer surplus, and welfare. A moredetailed description of ATPSM and the data,including a discussion of the specificdifficult ies result ing from modell ingagricultural policy changes with regard toquota rents, domestic support, two-way tradeand preferential access, can be found in Petersand Vanzetti (2004).18
The present version of the modelcovers 175 countries, of which the current 15European Union members form a singleregion. Countries designated here as“developed” are defined by the World Bankas high-income countries with per capita GNPin excess of $9,266 (World Bank, 2001).Another group is the 50 least developedcountries as defined by the United Nations.There are 36 commodities in the ATPSM dataset, covering most of the agricultural sector.This includes many tropical commodities ofinterest to developing countries, althoughmany of these have relatively little trade bycomparison with some of the temperate-zoneproducts.
The data in the model come fromdifferent sources, including AMAD, FAO,OECD, UN Comtrade, WTO and UNCTAD.The year 2000 represents the base year for themodel.
Export subsidy rates
One of the main characteristics ofATPSM is that domestic prices are al lfunctions of the world market price, borderprotection and subsidies. All protection andsupport measures are expressed in tariff rateequivalents. Specific and mixed tariffs,domestic support, export subsidies and exportcredit subsidy elements are converted into advalorem equivalents.
Simplified, a producer receiving exportsubsidies gets Pw(1+s), where Pw is the worldprice and s is the export subsidy rate, for acommodity sold abroad. The supply reactionto a change of the export subsidy equals thesupply elasticity, å , multiplied by the changeof the producer price, Pw(1+s). Additionally,cross-price effects are taken into account.However, the other policy measures, domesticsupport and impor t tariffs, which alsoinfluence the production decision and the two-way trade of one and the same product haveto be taken into account. Two-way trade occursbecause products are aggregates and thereforecountries simultaneously import and exportdifferent components of the same aggregate.To accommodate two-way trade, a composite
5. SIMULATING EXPORT SUBSIDY REDUCTIONS
17 An operational version of the model, associated database and documentation are available free of charge fromUNCTAD (http://www.unctad.org/tab).
18 In this paper the “standard” ATPSM version has been used. In this version it is not the Armington assumptionthat determines imports but the condition that percentage changes in exports equals the percentage change of theproduction. Import changes are the residual of changes in production, consumption and exports.
18
domestic price is required. The compositeprice depends on import tariffs, exportsubsidies and domestic support measures. Asa result, import tariffs and export subsidies donot have to be equal as in the simplifiedtheoretical model, but rather single measurescan be changed separately. The techniquechosen in the model is described in box 3. Theeffect is that, ceteris paribus, a higher exportsubsidy leads to higher production and exportsof the corresponding good. The impact ofexport subsidies on domestic prices dependson the proportion of domestic productionexported. Because there is a greater incentiveto produce for export markets, consumptionprices are positively correlated with exportsubsidies provided in the same country.Furthermore, export subsidies depress worldmarket prices, and this results in lowerproducer and consumer prices in the othercountries.
Two export subsidy rates are calculated.One reflects the export subsidies actuallyreceived or applied and the second one reflectsmaximum allowable subsidies. The latter is abound rate for export subsidy rates.
The ad valorem export subsidy rates arecalculated from the WTO members’notifications, which comprise their annualcommitment and use in terms of budgetaryoutlays and volumes. The bound subsidy ratethat determines the maximum possible subsidythat can be provided is the year 2000commitment level divided by the ATPSMexport volume and the world market price.Thus, the bound rate expresses how much theobser ved export could maximally besubsidized without violating the WTO rules.Since in some cases current exports are low,bound export subsidy rates are very high inthese cases.
The applied subsidy rates are calculatedfor each year between 1995 and 2000 on thebasis of the formula
WTO
WTO W
ESexport subsidy rateX P
= ,
where ESWTO is the notified use of budgetaryoutlay, XWTO is the notified subsidized quantityand PW is the world price. Because budgetaryoutlays and subsidized quantities vary fromyear to year the applied subsidy rate used in
Box 3. Prices in ATPSM
All domestic prices are functions of the world market price and the border protection or specialdomestic support measures. Transaction costs are not taken into account.
First, a domestic market price wedge td is computed as the weighted average of two tariffs, theexport subsidy tx and import tariff tm, where the weights are exports X and imports M: td = (X tx + M tm)/(M + X).
Second, a consumption tariff tc is computed as the weighted average of the import tariff tm andthe domestic market tariff td, where the weights are imports M and domestic supply Sd: tc = (M tm + Sd td)/ D.
Third, a supply tariff ts is computed as the weighted average of the export tariff tm and thedomestic market tariff td, where the weights are exports X and domestic supply (Sd) plus the domesticsupport tariff tp: ts = (X tx + Sd td) / S + tp.
The domestic consumer price is Pc=Pw(1+tc) and the domestic producer price is Ps=Pw(1+ts).The calculations of consumer and producer prices are applied both to the initial and to the final tariffs.
19
ATPSM is the average of the six annual subsidyrates.19 The obtained applied export subsidyrates have to be adjusted to the ATPSM exportdata, because there is not a one-to-onecor respondence between the productdefinit ion in ATPSM and the productcategories used in the notifications. For theestablishment of export subsidy reductioncommitments during the Uruguay Round 24groups of products were specified by theWTO. The correspondence of these groupswith the ATPSM classification is shown intable A1 in the Appendix. The structure ofschedules, however, varies between countries.Each member uses dif ferent productcategories. Switzerland, for example, reportsin f ive broad product g roups, whereasVenezuela reports in 72 detailed groups. Thedifferent groups of products were assigned tothe 36 ATPSM commodities as best aspossible.
Export subsidies may be applied tosome rather than all exports within a productcategory. If a subsidized volume that is notifiedto the WTO is smaller than the export volumein the ATPSM database, the calculated subsidyrate is adjusted downwards so that theexpenditure for the specific product is nothigher than the notified budgetary outlay. Onthe other hand, if exports in ATPSM aresmaller than the notified subsidized exportvolume, the subsidy rate is not adjustedupwards in order to avoid a higher rate thanthe actual rate. Furthermore, where an appliedsubsidy rate is higher than the correspondingbound subsidy rate, the bound rate is used asthe applied export subsidy rate in ATPSM.Since the initial applied rate is an average overthe six years when binding commitments were
reduced annually, the bound rate that dependsonly on the final commitment is smaller thanthe average for a commodity for whichsubsidies were always c lose to thecommitment.
These downward adjustments and theexclusion from the model of products such ascut flowers, juice and wine for which exportsubsidies are provided imply that the sum ofexport subsidy expenditures in ATPSM at $4.4bil l ion is significantly smaller than theobserved average of $6.2 billion. The resultsshown below are thus biased downwards forthis reason.
A specific difficulty is the calculationof subsidy rates for Canadian dairy products.Canada notified to the WTO very little or niluse of export subsidies. However, as describedin box 2, the WTO Appellate Body found thatCanada’s commercial export milk practicesconstitute export subsidies. Since it is notpossible to calculate the exact subsidycomponent of this policy, we assumed thatCanada provides the maximum legitimateexport subsidies to its dairy products of $54.5and calculated the corresponding subsidy rate.
Export credits
Since official data on export credits andassociated conditions were not available, thedata in the ATPSM database on the subsidyelement of export credits are taken from theOECD (2000).20 Unfortunately, the estimatedamount of the export subsidy element is givenonly by countries or by product groups butnot by country and product. Thus, an estimateof how much a specific country subsidizes a
19 Data for 2001 and following years are available only for some countries. For those few countries that have not yetnotified for 1999 and 2000 the average for 1995 to 1998 was taken. However, data for the whole period wereavailable for those countries that provided more than 99 per cent of the export subsidies between 1995 and 1998.
20 There are several deficiencies with these data. They cover only those countries that joined the Export CreditArrangement, and the basis for the interest rate is solely 1998, a year in which the financial crises may bias theresults obtained by the OECD. Furthermore, only officially supported export credits were taken into account andexchange rate guarantees were not included. To calculate the hypothetical market conditions, a credit ranking for theimporter is necessary but not always available, in which cases standard Moody rankings were used.
20
specific product through export credits is notavailable. Estimates are constructed using theavailable information from the OECD andATPSM export revenue data. For each countrythe total amount of the subsidy element isdistributed among the ATPSM products inproportion to the weighting of subsidy amountestimates across commodity groups and theexport revenue. Thus, the export credit subsidyelement rate is
j
iij j
ij W jj
ECexport credit subsidyelement rate sX P s
=∑ ,
where ECi is the amount of the subsidyelement in country i, Xij is the export ofcountry i of commodity j, Pwj is the world priceof commodity j and sj is the reported share ofsubsidies of the product group j in the totalsubsidy.
The consequence of this approach isthat there are export credit subsidy elementson each product in the EU, the United States,Canada, the Czech Republic and the Republicof Korea. For Australia, additional informationwas available. Since Australia provides exportcredits only for wheat, the whole estimatedsubsidy element was attr ibuted to thiscommodity.
After the subtraction of export creditsfor which the products are unknown or whichare on products not covered by ATPSM, suchas wool, the total export credit subsidy in theinitial model database amounts to $228 million.This is in addition to the total export subsidyexpenditure of $4.4 billion. Thus, the totalexport subsidy amount in ATPSM is $4.6billion. This compares with global exportrevenue for the 36 commodities in the modelof $200 billion.
The calculated export credit subsidyelement rate was added to both the bound andthe actual export subsidy rate. Thus, the exportcredit subsidy element is treated as anadditional export subsidy. This rate is
comparably small. The simple average is 0.07per cent in the EU, 0.33 per cent in the UnitedStates, 0.13 per cent in Australia (only wheat),0.07 per cent in Canada, 0.02 per cent in theCzech Republic and 0.0005 per cent in theRepublic of Korea. This compares with muchhigher export subsidy rates. For example, theEU rate for beef is 54 per cent, for butter 79per cent, for wheat 13 per cent and for sugar31 per cent. The US rate for concentrated milkis 30 per cent and for butter 33 per cent.Norway’s rate for beef is 145 per cent and forsheepmeat 121 per cent. Switzerlandsubsidized its dairy products with a rate of 95per cent. There are also many small rates, suchas 1.2 per cent on barley in South Africa.
How ATPSM works: The EU’s beefexport subsidies
Export subsidies are complex. Toillustrate how they are modelled withinATPSM we provide an example of EU bovinemeat, a heavily subsidized sector. Accordingto WTO notifications, the EU provided onaverage $1.1 bill ion annually of exportsubsidies for beef meat. The subsidizedvolume was on average 851,000 metric tonnesannually. After adjusting to the ATPSMcommodity classification $800 million remain.Since EU’s exports of beef in the ATPSMdatabase are 0.645 million tonnes and the initialworld price for beef is $2,300 per tonnes, theexport subsidy rate is about 54 per cent. Theexport credit subsidy element rate is 0.03 percent.
From the subsidy, domestic supportand import tariff rates and the volumes thecomposite tariffs tc and ts are calculated (seebox 3). These give the domestic consumer andproducer prices, and changes in the distortingmeasures determine the price changes, whichthen verify the volume changes.21 Table 3 givesan example of the changes resulting from anelimination of export subsidies for EU beefexports.
21 Since ATPSM is an equilibrium model a mechanism ensures that domestic and global markets are always clear.
21
The elimination of the export subsidyreduces the composite consumption andsupply tariff, which leads to lower consumerand producer prices in the EU, although thewor ld price increases sl ightly. As aconsequence, the EU’s consumption andimports increase and production and exportsdecrease. Tariff revenues are increased owingto the rise in imports.
Modelling limitations
There are various l imitations inmodell ing trade policy changes andinterpreting the results. These includemodelling preferential access, the lack ofknowledge of the distribution of quota rents,the static nature of the model, the absence ofadjustment costs, intersectoral andmacroeconomic effects, and, of course, dataquality. These are discussed in greater detailin Vanzetti and Peters (2003).
Specific limitations concerning exportsubsidies and credits include data availability,which is discussed above, the difficulty withboth volume and value constraints, and thelimitations in view of the fact that exportsubsidy rates are used. In ATPSM effectivelyonly value constraints and budgetary outlaysare used. Quantity commitment levels and thequantity of subsidized exports are availableand have been used to calculate the exportsubsidy rates. However, these subsidy rateswere then adjusted to the ATPSM exportvolumes. Thus, instead of, for example,subsidizing a small quantity by a high subsidyrate, al l exports are subsidized by anaccordingly lower rate. This may bias theresults. De Gorter (2004) discusses theinterplay according to volume and valueconstraints. Furthermore, the change ofexport subsidy rates impacts on world pricesand export volumes. As a consequence, subsidyexpenditures need not be reduced by exactly
Table 3. The impact of export subsidy elimination on the EU beef market
Initial values Final values
Export subsidy rate % 53.9 0Export credit rate % 0.03 0Import tariff % 138 138Domestic support rate % 0 0Consumption tariff tc % 89.4 58.2Supply tariff ts % 83.7 48.8
World price $/t 2 300 2 342Producer price $/t 4 224 3 484Consumer price $/t 4 357 3 706
Consumption kt 7 158 7 577Production kt 7 396 7 130Exports kt 645 622Imports kt 407 1 069
Tariff revenue $m 793 2 948
22
the same percentage as the subsidy rate, sinceexpenditures are a product of volumes, worldprices and subsidy rates.
Another l imitation is that somecountries that provide export subsidies haveproduction quotas for products they subsidize,for example beef and dairy products in thecase of the EU. If the quota is binding, areduction of export subsidies may not(immediately) lead to reduced exports. Sinceproduction quotas are not taken into accountin ATPSM any change to export subsidies leadsto changes of the production and exportincentives. Thus, the production- and export-limiting effect of a reduction of exportsubsidies may be overestimated.
Furthermore, many countries, such asthe United States in the case of wheat, provideexport support on a bilateral basis, that is forspecific countries. An elimination of suchsubsidies would have no impact on worldprices if the importing countries would faceliquidity constraints on purchasing food wherethey otherwise could not. However, the OECD(2000) has shown in the case of export creditsthat only a small share of subsidized exportsare imported by, for example, least developedcountries. Thus, it is likely that without anysubsidies a large proportion of the demandwould be on world markets.
Finally, the economic impact of exportcredit subsidy elements is different from thatof export subsidies. Export subsidies permitexporters to sell products at world prices evenif production costs are higher. Thus, producersreceive the budgetary outlay. This need not bethe case with export credits, where importersreceive at least parts of the subsidy element.However, since data about the bilateral flowsbenefiting from export credits with a subsidyelement were not available, export credits weretreated as export subsidies.
Scenarios
Several simulations are undertaken toanalyse the effects of reductions of exportsubsidies (see table 4). In an ambitiousscenario, all export subsidies and export creditsubsidy elements are eliminated. This reflectsthe WTO General Council decision of August2004 and the early positions of the CairnsGroup, the Group of 20 and other developingcountries. A 50 per cent reduction scenario isvery close to the initial EU position wherebyexport credits are to be reduced by 45 per cent.
Because of the interaction with otherborder measures, import tariffs and domesticsupport measures are also reduced. However,since we want to compare the scenarios withdifferent reductions in export subsidies, the
Label Description
Basic A reduction in bound out-quota tariffs of 36 per cent in developed countriesand 24 per cent in developing countries; a 60 per cent and 20 per centreduction of domestic support in developed and developing countries, re-spectively. No reduction in export subsidies or export credit subsidy ele-ments. No reductions in least developed countries.
50 per cent As in the Basic scenario, plus a 50 per cent reduction of bound export subsi-reduction dies and export credit subsidy elements.
Elimination As in the Basic scenario, plus the total elimination of export subsidies andexport credit subsidy elements.
Table 4. Alternative liberalization scenarios
23
reduction of the tariffs and domestic supportremains the same across all scenarios. A thirdscenario, in which export subsidies are notchanged, provides a benchmark.
Since the export credit subsidy elementrate is added to the bound and the appliedsubsidy rate it is implicitly assumed that anagreement would restrict the use of exportcredits with a subsidy element. Furthermore,bound rather than applied export subsidy ratesare reduced.
In the following an equal percentagereduction in bound export subsidies and inexport credit subsidy elements is summarized
as a reduction of export subsidies.Furthermore, we will look at the additionaleconomic effects resulting from a reductionof export subsidies. Because of the interactionof various border measures, we are comparinga situation in which only tariffs and domesticsupport are reduced with one in which inaddition export subsidies are reduced. Thus,we compare the Elimination and 50 per centreduction scenarios with the Basic scenario.The concentration on the two extremes – theBasic scenario and the Elimination scenario –may overemphasize the economic effects.However, the qualitative results are the sameif we compare a 55 per cent with a 45 per centreduction of export subsidies.
24
The tariff reduction scheme, asspecified in the Basic scenario, is the same inall three scenarios. The Uruguay Roundcontinuation leads to an import tariffreduction in developed countries and, becauseapplied tariffs are smaller than bound tariffrates in most developing countries, to a smallreduction of tariffs in developing countries.As a consequence, world market pricesincrease. Peters and Vanzetti (2004) providemore details of this scenario. Prices fortemperate products increase more than pricesfor tropical products. Globally, the totalwelfare effect is positive, but some countrieslose while others gain. In highly protectingdeveloped countries consumers and taxpayersgain, producers lose and the overall welfareeffect is positive. In most developing countriesproducers gain, whereas consumers lose as theresult of higher domestic prices. The overallwelfare effect varies from country to country,depending on the production and tradestructure. Most least developed countries arenet food-importing developing countries andsuffer from increasing food prices. Theseresults can also be seen in the first columnsof tables 5 to 8.
Impact on world prices
Eliminating export subsidies leads to afurther increase in world market prices. Sincein the Basic scenario the average tradeweighted price increase is 1.3 per cent and inthe Elimination scenario 2.9 per cent, the
additional price increase as a consequence ofthe export subsidy el imination is 1.6percentage points. Thus, compared with theprice effects resulting from a Uruguay Roundcontinuation concerning import tariffs, anelimination of all export subsidies has aconsiderable impact on world market pricemovements.22
In the 50 per cent reduction scenario theaverage trade-weighted price increase is 2.1 percent. The average reduction in actual exportsubsidy rates is only 14 per cent (simpleaverage) and 10 per cent (trade-weighted) ifbound export subsidies are reduced by 50 percent. This reflects the difference betweenbound and applied subsidies. In many casesthe export subsidy constraints are not binding.However, total export subsidy expenditures,including export credit subsidy elementamounts, are reduced by 48 per cent. Thereason is that it is not only the export subsidyrate that has been reduced but also exports.Hence, in general, subsidy expenditures arereduced by a higher percentage than subsidyrates. Furthermore, export subsidies forcommodities that represent the bulk ofsubsidy expenditures are often up against theirconstraints. For example, the EU’s actualexport subsidy rate on concentrated milkequals the bound rate.
The increase in the world market priceand the reduction in exports from export-subsidy-providing countries as a result of
6. RESULTS
22 However, the trade-weighted price increase in a scenario where all tariffs but not the export subsidies are eliminatedis at 6.9 per cent higher than the price increase that stems from an elimination of export subsidies (1.6 per cent).Thus, the price increase resulting from eliminating tariffs is about four times higher than the one resulting fromeliminating export subsidies. This corresponds to the finding of the Economic Research Service at the US Departmentof Agriculture (2001) that market distortions resulting from tariffs are four times as high as the one resulting fromexport subsidies.
25
subsidy reductions have a different influenceon various countries and groups of economicagents.
Consumers and producers in differentcountry groups
The ATPSM results ref lect thetheoretical considerations set out above.Consumers in developed countries, whichprovide the bulk of export subsidies, benefitfrom the elimination of export subsidies,
whereas the additional consumer surplus forall other country groups is negative (lastcolumn in table 5) because of increasing prices.Producers, however, benefit in all countrygroups from a reduction of export subsidiesexcept in developed countries, whereproducers lose the export support (table 6).Exports from developing countries areincreasing and these exporters benefit fromhigher world market prices. As expected,Cairns Group members in particular gain ifexport subsidies are removed.
Basic Difference(no exp. sub. 50 per cent Elimination
reduction) reduction Elimination and Basic $m $m $m $m
Developed 15 151 18 684 22 785 7 634Developing -4 943 -12 877 -20 795 -15 852Least developed -1 408 -1 853 -2 298 -890World 8 799 3 953 -309 -9 108Cairns -3 274 -5 485 -7 689 -4 415Developing, ex. Cairns -2 069 -8 453 -14 826 -12 757Group of 20 -3 815 -8 271 -12 718 -8 903
Table 5. Consumer surplus impacts resulting fromexport subsidies reductions
Basic Difference(no exp. sub. 50 per cent Elimination
reduction) reduction Elimination and Basic $m $m $m $m
Developed -9 973 -15 101 -20 428 -10 455Developing 6 062 13 527 21 031 14 969Least developed 1 320 1 711 2 104 784World -2 590 138 2 706 5 296Cairns 4 037 6 492 8 961 4 924Developing, ex. Cairns 2 942 8 869 14 825 11 883Group of 20 4 045 8 437 12 850 8 805
Table 6. Producer surplus impacts resulting fromexport subsidies reductions
26
The high additional gains for producers($15 billion) and losses for consumers ($16billion) in developing countries caused byelimination of export subsidies are remarkablecompared with the surplus changes in the tariffreduction scenario ($6 billion and $5 billion,respectively). The average price increaseresulting from an elimination of exportsubsidies is higher than the one resulting fromthe tariff reduction scenario, and so thenegative effect on consumers is greater.Producers in developing countries benefitfrom the higher world price and increasedexports. Furthermore, their own marketsremain substantially protected. Producers indeveloping countries as a group wouldprobably gain a great deal from elimination ofexport subsidies. These gains are not confinedto Cairns group countries but, as shown intable 6, also to non-Cairns Group developingcountry producers. However, they depend onthe assumption that changes in world pricesare fully transmitted to the domestic market,which is also the reason for their ownconsumers’ losses.
Welfare changes
Eliminating all export subsidies yieldsglobal annual welfare gains of $4.3 billion(table 8). The welfare change is the sum ofchanges of the consumer and producer surplus(including quota rents) and governmentrevenue. As might be expected, if exportsubsidies are eliminated, the only immediateaggregate winners in terms of welfare are thesubsidizing exporters and the net agriculturalexporters. In subsidizing countries, thereduction in export subsidy expendituresgenerates most of the gains. The vast majorityof Cairns Group members, developed anddeveloping alike, benefit from the increase innet export revenues and experience a welfaregain. In many of the other developing anddeveloped countries, with the exception of thesubsidizing countries, the positive producersurplus does not outweigh consumer lossescaused by increasing food prices if equalweights are attached to both groups.
DifferenceReduction Reduction Reduction Elimination0 per cent 50 per cent 100 per cent and Basic
$m $m $m $m
Developed 3 356 4 094 5 291 1 935Developing 6 987 8 516 10 201 3 214Least developed 626 722 823 197World 10 970 13 333 16 315 5 345Cairns 3 148 4 376 5 685 2 537Developing, ex. Cairns 4 881 5 786 6 809 1 928Group of 20 4 857 5 981 7 175 2 318
Table 7. Export revenue change impacts
27
This is especially the case for leastdeveloped and net food-importing developingcountries. These countries are supply-side-constrained and cannot adequately respond tothe higher prices. In ATPSM this is reflectedin a low base production (the currentlyobserved production) and supply elasticities asestimated by the FAO. Furthermore, exportsubsidies are often on temperate product foodsimported by food-deficit developing countries.Many of these countries do not havecomparative advantages in the production ofthese commodities and thus suffer from terms-of-trade losses. However, in the longer term,supply capacities could be improved andsubstitutes increasingly produced. Anenhanced effort in technical assistance andsupport programmes could contribute tomitigating adjustment costs. Neither thesepossibilities nor potential dynamic gains fromincreasing investments are reflected in theATPSM results.
In the current round of negotiationsalmost all countries, including net food-importing developing countries, demanded theelimination of export subsidies. This isunderstandable if Governments give moreweight to producer welfare than the welfareof consumers. Improving rural development
and poverty alleviation among the ruralpopulation may be reasons for such anemphasis in some countries. In others, thisemphasis may reflect the political power ofproducers. Furthermore, many countries hopeto considerably increase their food productiononce export subsidies are eliminated and thusto be less dependent on food imports. Thismakes an improvement of supply-side factorssuch as strengthening institutions andupgrading the infrastructure very important.Additionally, if increasing domestic productionenhances food security, the elimination ofexport subsidies contributes positively.
Sectoral analysis
The effects of eliminating exportsubsidies vary for each commodity. Figure 8shows the difference in the welfare effect ofthe Elimination scenario and the Basic scenariofor the 11 commodities for which exportsubsidy expenditures are at the bound levels.
In the following the effects ofremoving subsidies on bovine meat, sugar,wheat, dairy and vegetable oil, oilseeds andtobacco are analysed in greater detail. We willalways compare the scenario in which theexport subsidies and export credit subsidy
Basic Difference(no exp. sub. 50 per cent Elimination
reduction) reduction Elimination and Basic $m $m $m $m
Developed 8 870 11 402 14 405 5 535Developing 717 129 -360 -1 077Least developed -116 -172 -226 -110World 9 471 11 360 13 819 4 348Cairns 797 1 069 1 369 572Developing, ex. Cairns 514 -57 -545 -1 059Group of 20 146 -29 -175 -321
Table 8. Welfare impacts
28
elements for the respective commodity areeliminated with the Basic scenario. It is clear,however, that producers in countries thatinitially do not provide export subsidies alwaysbenefit from reductions of export subsidies.
Bovine meat
On the basis of the model, theelimination of total beef export subsidies of$0.8 billion leads to additional welfare gainsof $1.83 billion. The welfare gains exceed theinitial expenditure because export prices affectdomestic prices and distort production for thedomestic market as well as the export market.The world market price for bovine meatincreases by an additional 1.86 percentagepoints. The EU provides 98 per cent of totalexport subsidies and its additional welfare gainis $1.85 billion. The welfare gain has threecomponents. First, EU consumers gain anadditional $5.16 billion from reduced domesticconsumer prices; second, producers lose $5.48
bil l ion because of decreasing domesticproducer prises and decreasing production;and, third, government revenue increases by$2.17 billion. The latter is composed of a fallin subsidy expenditure and additional out-of-quota tariff revenue of $1.37 billion. Theremoval of the export subsidy leads to afurther decrease in consumer prices in the EUand this generates additional imports. Since theimport tariff is the same under both scenarios,the tariff revenue increases when the subsidyis eliminated.
The changes in consumer and producersurplus and the welfare effects are as in thesimplified theoretical model described insection 3. If, in figure 5, the domestic pricedecreases owing to the policy change from PDand ends up between PS and Pw, the tariffrevenue would increase, as is the result here.For this, the tariff T and the subsidy wouldhave to be reduced. However, as discussed insection 5, the underlying economic model inATPSM differs in that there is a compositetariff that combines the three measures –import tariffs, export subsidies and domesticsupport – because of two-way trade. Thus,separate changes in border measures can beassessed, although there is an interactionbetween tariffs and export subsidies.
The EU as the provider of most of the beefexport subsidies gains most from their elimi-nation. Net exporters of bovine meat such asAustralia, New Zealand, Brazil, China, Canada,Uruguay and Argentina also gain.
136
1 833
496 309 417 419 394
228 24 - 35 13
107
- 200 0
200 400 600 800
1 0001 2001 4001 6001 8002 000
Milk,conc.
Bovinemeat
Cheese Barley Sugar Wheat Butter Pigmeat Poultry Maize Rice Others
Figure 8. Additional welfare gains, by commodity
Source: ATPSM simulations.
29
Norway, which also provides exportsubsidies on bovine meat, gains $26 million,for the same reason as the EU. Other majorwinners from an elimination of exportsubsidies on bovine meat are Australia, NewZealand, Brazil, China, Canada, Uruguay andArgentina. These net exporters gain fromincreased world market prices. The additionalgains per gross value of production from theexport subsidy elimination on bovine meat areeven higher in some African countries. Amongthe latter are, for example, Botswana, Mali andNamibia. Zimbabwe also gains. However, theseACP member countries may suffer frompreference erosion since export subsidies addto the border protection faced by countriesthat do not benefit from preferential access.In our simulation it has been assumed forbovine meat that quota rents that originatefrom tariff rate quotas accrue to importingcountries. These quota rents do not fully coverall preferential access rents but capture mosteffects of preference erosion. A simulation inwhich the initial quota rents accrue toexporting countries shows, indeed, that someof these countries could lose as the result of aliberalization of the bovine meat market owingto preference erosions. However, these lossesstem from tariff reductions, and not fromexport subsidy reductions, because theadditional effect of el iminating exportsubsidies is always positive for these Africancountries. Table 9 shows that the leastdeveloped countries gain as a group from theelimination of export subsidies. The majorwinners in this group of countries are Mali,Sudan, Myanmar, Burkina Faso and Chad.However, there are also some least developedcountries such as Angola with greater lossesif export subsidies on beef are removedentirely.
In addition to some least developedcountries, net beef-importing countries suchas Japan, the United States, the Republic ofKorea and Mexico lose as the result of anelimination of export subsidies on bovinemeat. The United States does not provide anyexport subsidies on bovine meat. Japan, with
minus $61 mill ion, is the biggest loser.Producers in all these countries benefit fromhigher prices, but their gains do not outweighthe consumers’ losses, so that the overallwelfare gains concerning bovine meat aresmaller in the Elimination scenario than in theBasic scenario.
Producers in all developing and leastdeveloped countries gain from an eliminationof export subsidies.
Sugar
When export subsidies on sugar ofinitially $482 million are eliminated in additionto reducing tariffs, the world price for sugar isadditionally increased by 2.3 percentage points.The additional global welfare gain is $417million. The EU provides 96 per cent of theinitial export subsidy expenditures and gains$342 million from the elimination of sugarsubsidies. Consumers gain $707 million,producers lose $1,053 mil l ion and theadditional government revenue increase is$689 million (mainly $460 million in savedexport subsidy expenditures and $387 millionin additional tariff revenue). Other majorwinners are Brazil, Mauritius, India, Australia,Thailand, Fiji and Cuba. It is important to notehere that we are comparing two simulationsthat differ only concerning the export subsidyreduction and we report the differences ofthese two simulations. Mauritius loses fromsugar market liberalization in the Basicscenario owing to preference erosion, but itgains from the additional elimination of exportsubsidies. We assumed in all scenarios thatquota rents on sugar accrue to exporters.
Developed 1 861Developing -45LDC 586World 1 816
Table 9. Additional welfare gainsfrom eliminating export subsidies
on bovine meat ($m)
30
Among the winners are other African countriessuch as Zimbabwe, South Africa, Swazilandand Côte d’Ivoire and Caribbean countriessuch as Belize.
However, gains for many developingcountries would probably be limited since, onthe one hand, access to markets is limited byhistorical quota allocations, and, on the otherhand, it would be difficult in a liberalizedmarket to compete with lower-cost producerssuch as Brazil.
In major net sugar-importing countriessuch as the United States, the RussianFederation, Japan, China, Indonesia, Pakistan,the Islamic Republic of Iran, the Republic ofKorea and Algeria imports and tariff revenuedecrease and the consumer surplus decreasesmore than offset producer gains.
Both developing and least developedcountries gain as a group from removingexport subsidies on sugar, whereas developedcountries lose (see table 10). Thus, accordingto our results a development-friendlynegotiation round should aim at phasing outall export subsidies on sugar as early aspossible.
Dairy products
Subsidies on dairy products amount toalmost 40 per cent of total export subsidies.The EU provides almost 80 per cent ofsubsidies on dairy products. It gains about $1.4billion and the other countries providing thebulk of subsidies – Norway, Canada, the
United States and the Czech Republic – alsogain. Countries benefiting from additionalexports include Australia, Argentina and NewZealand. Many least developed and developingcountries have negative additional welfareeffects as the result of removing exportsubsidies on dairy products (see table 11). Thisreflects again the fact that producer gains inthese countries may be outweighed byconsumer losses.
Table 11. Additional welfare gainsfrom eliminating export subsidies
on dairy products ($m)
Wheat
The elimination of export subsidies onwheat has specifically negative impacts on leastdeveloped countries. In the ATPSM databaseall least developed countries are net wheatimporters and all except one least developedcountry lose from elimination of exportsubsidies of initially $395 million, essentiallybecause of the computed increase in the worldmarket price of 2.55 percentage points.However, since parts of the least developedcountry imports are provided as food aid andthus are not fully paid for by the beneficiaries,the negative impact may be overstated if foodaid is continuing to be provided. The EUprovides 84 per cent and the United States 13per cent of total wheat export subsidies. TheEU, the United States, Canada, Australia andArgentina are the five largest beneficiaries ofthe elimination of export subsidies. Amongthe developing countries gaining fromelimination of wheat subsidies are wheat-producing countries such as Argentina,Kazakhstan and Hungary.
Developed 1 439Developing -364LDC -39World 1 036
Table 10. Additional welfare gainsfrom eliminating export subsidies
on sugar ($m)
Developed 4 648Developing 4 185LDC 880World 417
31
Table 12. Additional welfare gainsfrom eliminating export subsides
on wheat ($m)
Thus, although there are efficiencygains from eliminating export subsidies onwheat, such a policy is expected to cause somehardship for many developing countr yconsumers (table 12). Since supply responsesare taken into account by ATPSM, the resultssuggest that it would be difficult for mostdeveloping countries to increase their wheatproduction or production of substitutes duringthe first years after elimination and with thisto reduce wheat imports sufficiently tooutweigh higher world prices.
Vegetable oil, oilseeds and tobacco
The EU proposal includes theelimination of export subsidies for productsof specific interest to developing countries aswell as wheat, vegetable oil, oilseeds andtobacco. Export subsidies for these productsaccounted for only 6.5 per cent of the EU’s
average export subsidies during the periodfrom 1995 to 2000 ($356 million). In theATPSM database, export subsidy expenditures,which include export credit subsidy elements,are $459 million for these products. Excludingwheat, expenditures for vegetable oil, oilseedsand tobacco account for only about 1 per centof total export subsidy expenditures. TheUnited States provides the majority of thesubsidies on these products. In line with therelatively small amount of subsidies, the gainsand losses also small (see table 13, which showsthe results from jointly removing subsidies onvegetable oil, oilseeds and tobacco). Countriessuch as Argentina, Brazil, Indonesia andMalaysia benefit from elimination of exportsubsidies on these products. Welfare gains areseveral million dollars, respectively. However,some developing countries such as China,India and Pakistan may experience initialwelfare losses. These countries are currentlyall net vegetable oil importers.
Developed 843Developing -293LDC -52World 498
Table 13. Additional welfare gainsfrom eliminating export subsidies on
vegetable oil, oilseeds and tobacco ($m)
Developed 5Developing -6LDC -2World 3
32
Agricultural export subsidies are oneof the most distorting of the numerousmeasures distorting agricultural trade, andimpose an unreasonable burden on thirdcountry producers, many of whom are indeveloping or least developed countries. Mostdeveloping countries cannot afford to payexport subsidies and fear that they are losingsome of their export competitiveness relativeto developed countries. Our results confirmthat producers in developing countries wouldbe the major winners from an elimination ofexport subsidies.
Export subsidies are interrelated withother policies such as tariffs that maintain highdomestic prices and domestic support. Themeasures may lead to overproduction, whichis disposed of through export subsidies ontoworld markets with adverse effects forproducers in non-subsidizing countries. Inorder to protect their producers against cheapsubsidized imports these countries may imposehigh tariffs. Thus, the elimination of exportsubsidies, a reform of domestic supportpolicies and reductions in import tariffs arelikely to go hand in hand. As shown byAnderson (2003) and others, developingcountries would benefit from liberalizing theirown markets and the elimination of exportsubsidies would make this more feasiblewithout costly adjustments.
Furthermore, a reinforcement of therural population, which heavily depends onagricultural production and is in generaldisproportionately poor, may contribute topoverty alleviation. Export subsidies candistort local markets in developing countries,causing harmful effects to small agriculturalproducers and possibly food security.
Using the partial equilibrium model,ATPSM, we estimate global gains from anelimination of all export subsidies of some$4.3 billion.23 The disaggregated results showthat the effects differ greatly by commodity,countr y and g roups within countries.Agricultural exporters such as the CairnsGroup members and producers in developingcountries are the major winners. Consumersin many developing countries would, however,experience higher food prices. In net food-importing countries producer gains may notimmediately outweigh consumer losses. Thesupply capacity has to be increased in order tobe able to adequately respond to the expectedincrease in international prices. To that end,efforts would need to be made to expand thosecountries’ supply capacity and to provideassistance during adjustment periods.
The biggest gains for developingcountries as a group would come from theelimination of export subsidies on sugar. Someleast developed countries and Latin Americancountries would gain significantly from theelimination of export subsidies on bovinemeat. It is shown that, in general, preference-receiving countries would also benefit fromelimination of beef and sugar export subsidies,although some may lose from preferenceerosion owing to a reduction of bound tariffs.This conclusion does not hold for al lcommodities. As nearly every developingcountry is a net importer of wheat, they wouldface higher food bills for their wheat imports.Producers and some developing countryexporters such as Argentina would, however,benefit from the elimination of wheat exportsubsidies.
7. CONCLUSIONS
23 This is in the same order of magnitude as estimates using the GTAP model, version 5.3.
33
In terms of total welfare, the EU asthe largest provider of export subsidies wouldreceive the largest gains from elimination ofexport subsidies. Producers, however, wouldlose as the result of such a policy.
All WTO members gave developmenta central role in the Doha work programme.UNCTAD (UNCTAD, 2003) has designedseveral development indicators against whichprogress in the multilateral trading system withregard to development goals can be assessed.With regard to the indicator “Equalopportunity for unequal par tners”, theelimination of export subsidies would level theplaying field, as developing countries are notable to subsidize their exports, and thus makea contribution. A positive contribution toachieving the goals set out in the UNMillennium Declaration, which is a factorcontributing to the indicator “Serving thepublic interest”, is also likely, although somedeveloping countries are expected to initiallyexperience welfare losses. The estimatedwelfare impacts are the sum of gains toproducers, exporters, consumers andtaxpayers. A problem with such welfareestimates is the presumption of equal weightsand the calculation at national levels. In manydeveloping countries agriculture is particularlyimportant because a disproportionately highshare of the poor live in rural areas. Thus, sincethe agricultural sector in developing countrieswould benefit from an elimination of exportsubsidies, the framework agreement wouldcontribute to achieving the goals of theMillennium Declaration in countries where themajority of the poor are subsistence farmersor live in rural areas. It may, however, increasethe necessity for support to the urban poor.Furthermore, since world commodity priceswould increase as a result of eliminating exportsubsidies, this policy would serve the indicator“Revital izing the commodities sector”.However, since the bulk of the exportsubsidies is not on commodities, on whichmany developing countries heavily depend, thecontribution is limited. Finally, to benefit from
the elimination of export subsidies, developingcountries need a “coherent” developmentstrategy which includes improving their supplycapacity and reducing transportation costs.
The limitations of the analysis shouldbe kept in mind. The model from which theconclusions are drawn relies on severalimportant assumptions. One is that productionquotas are not binding and therefore supplyimmediately responds to subsidy changes. Thisassumption leads to an overstatement of thebenefits to third country exporters. A secondassumption is the focus on budgetary outlayconstraints rather than volume constraints.Another limitation is data availability. Here,only official export subsidies were consideredand a possible bilateral nature, where subsidiesare provided only for exports to specificcountries, could not be taken into account. Ashas been confirmed by recent WTO DisputePanel decisions, the officially notified exportsubsidies are lower than actual subsidies; thusour analysis underestimates the result of anelimination of all forms of subsidizingexports. Further limitations that are commonto computable equilibrium models werediscussed above.
In spite of these limitations, the resultsprovide a useful indication of the likely impactsof a reduction or an elimination of exportsubsidies. Producers in developing countrieswould receive considerable gains without highadjustment costs. Least developed countriesand net food-importing countries should beaware of the possible impact on consumersresulting from increasing food prices forspecific products such as wheat. Although thismay be advantageous to their producers, whoinclude some of the poorest sections ofsociety, it may also have consequences for theurban poor. It therefore seems reasonable todevelop support mechanisms to help thepoorer countries to adjust to the changes thatare likely to occur as a result of the currentWTO negotiations.
34
ABARE (2001). “Export subsidies in the current WTO agriculture negotiations”, ABARE currentissues, July 2001.
ABARE (2003). “Three pillars of agricultural support” by Ivan Roberts, ABARE Report 03.5.
Anderson, K. (2004). “Agriculture, trade reform and poverty reduction: Implications for sub-Saharan Africa”, UNCTAD Policy Issues in International Trade and Commodities StudySeries, No. 22, Geneva.
Brander, J.A. and Spencer, B.J. (1984). “Export Subsidies and International Market Share Rivalry”,NBER Working Paper No. W1464.
CAIRNS Group (2000). Cairns Group Negotiating Proposal, Export Competition, WTO documentG/AG/NG/W/11.
De Gorter, H. (2004). “Market access, export subsidies, and domestic support: Developing newrules for the agreement on agriculture“ in Agriculture and the New Trade Agenda, Ingco, M. D.and Winters, A. L. (eds.), Cambridge University Press.
European Commission (2002). “WTO and agriculture: European Commission proposes moremarket opening, less trade-distorting support and a radically better deal for developingcountries”, Brussels.
European Commission and United States (2003). “Joint EC-US paper: Agriculture”, WTOdocument JOB(03)/157, Geneva.
Gaisford, J. D. and W. A. Kerr (2001). “Deadlock in Geneva: The battle over export subsidies inagriculture”, University of Calgary, Department of Economics Discussion Paper No. 2001-07.
Hoekman, B., Ng, F. and Olarreaga, M. (2003). “Agricultural tariffs versus subsidies: What’s moreimportant for developing countries”, mimeo, World Bank, Washington, DC.
Laird, S., Cernat, L. and Turrini, A. (2003). “Back to basics: market access issues in the DohaAgenda”, United Nations, UNCTAD/DITC/TAB/Misc.9.
Leetmaa, S. (2001). “Agricultural policy reform in the WTO: The road ahead”, Burfisher, M.E.(eds.), ERS Agricultural Economics Report No. 802, May 2001.
REFERENCES
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OECD (2000). “An analysis of officially supported export credits in agriculture”, OECD, Paris.
Oxfam International (2002). “Rigged rules and double standards”, Oxford.
Peters, R. H. and Vanzetti, D. (2004). “Shifting sands: Searching for a compromise in the WTOnegotiations on agriculture“, UNCTAD Policy Issues in International Trade andCommodities Study Series, No. 23, UNCTAD/ITCD/TAB/23.
Stiglitz, J.E. and Charlton, A. (2004). “The Development Round of Trade Negotiations: In theAftermath of Cancun”, Initiative for Policy Dialogue, Report for Commonwealth Secretariat.
UNCTAD (2003). Note by the Secretariat for the Trade and Development Board, 50th session,TD/B/50/8, Geneva.
USDA (2001). “The road ahead: Agricultural policy reform in the WTO – Summary Report”,Economic Research Service, USDA, Washington, DC.
USDA (2002). U.S. proposal for global agricultural trade reform, actual language of U.S. WTOagriculture, proposal presented in Geneva, Washington, DC. http://www.fas.usda.gov/itp/wto/actual.htm.
Vanzetti, D. and Peters, R. (2003). “The good, the bad and the ugly: Three proposals for agriculturalpolicy reform“, in Processing Towards the Doha Development Agenda“, Inama, S. and Xuto, N.(eds.), ADB and UNCTAD.
World Bank (2001). “Global economic prospects and the developing countries 2001”, Washington,DC, http://www.worldbank.org/prospects/gep2001/.
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36
APPENDIX
Product concordance
Table A1. Product concordance for the calculation of export subsidy rates
SITC ATPSM WTO notifications
01100 Bovine meat Bovine meat01210 Sheepmeat Sheepmeat01220 Pigmeat Pigmeat01230 Poultry Poultry meat02212 Milk, fresh02222 Milk, conc. Skim milk powder, other milk products02300 Butter Butter and butteroil02400 Cheese Cheese04100 Wheat Wheat and wheat flour04200 Rice Rice04300 Barley Coarse grains (distributed on sorghum and barley,
according to export ratio)04400 Maize04530 Sorghum Coarse grains (distributed on sorghum and barley,
according to export ratio)05420 Pulses Vegetables (if not specified in greater detail05440 Tomatoes then distributed according05480 Roots & tubers to export ratios)05700 Non-citrus fruits Fruit05710 Citrus fruits05730 Bananas05790 Other tropical fruits06100 Sugar Sugar07110 Coffee green07120 Coffee roasted07131 Coffee extracts07210 Cocoa beans07220 Cocoa powder07240 Cocoa butter07300 Chocolate07410 Tea12100 Tobacco leaves Tobacco12210 Cigars12220 Cigarettes12230 Other mfr tobacco22100 Oilseeds Oilseeds26300 Cotton linters Cotton42000 Vegetable oils Vegetable oils, olive oils
37
Export subsidies on live animals, eggs, wine, incorporated products and other productswere not taken into account. No positive subsidies on oilcakes were reported. Since the WTOmembers did not adhere to the WTO classification and some notifications are more detailed,there are also subsidies on maize, citrus fruits, bananas, other tropical fruit, coffee, cocoa, chocolate,tea and cigarettes in the ATPSM database. The assignment was not always straightforward. Forexample, some countries notified subsidies on butter, cheese and other milk products, in whichcase subsidies on other milk products were assumed to be on skim milk powder. When, however,subsidies on skim milk powder, butter and other milk products were reported, the latter wereassumed to be on cheese.
The ATPSM modelling framework
ATPSM is a deterministic, comparative static, partial equilibrium model. This means thatthere are no stochastic shocks or other uncertainties, and there is no specific time dimension tothe implementation of the policy measures or to the maturing of their economic effects. Thecomparative static nature of the model does not imply that the policies take effect instantaneously.Rather, we are comparing two states at a similar point in time, one with the policy change, theother without. Finally, whereas the model aims at estimating far-reaching details of the agriculturaleconomy, it does not deal with the repercussions of barrier reductions on other parts of thenational economy. Thus, effects neither on the government budget (except for tariff revenues andsubsidies to exports and domestic production) nor on the industrial and service parts of theeconomy or the labour market are the subject of analysis. Simplifying the model in these respectsallows for detailed specifications of policies in a large number of countries for numerouscommodities.
Two versions of ATPSM are available. In the “Armington version” the change in importsis determined through an “Armington” elasticity and exports are the residual of production,consumption and imports. In the “Standard version” the percentage change of exports equals thepercentage change of production and imports are determined so as to clear the market (see equationsystem below). Both assumptions have their advantages and disadvantages. The Armington modelis discussed in greater detail in Peters and Vanzetti (2004). This paper focuses on exports andtherefore the standard version, where exports are not the residual, has been chosen.
Both versions give qualitatively exactly the same results, but the order of magnitude isvery different. Table A2 gives the results from simulating the same scenarios using the Armingtonversion. Presented is the difference between the Elimination scenario and the Basic scenario.
Consumer Producersurplus surplus Welfare
Developed 7 659 -10 494 1 836Developing -15 835 14 902 -733Least developed -889 782 -96World -9 065 5 190 1 007Cairns -4 410 4 910 602Developing, ex. Cairns -12 743 11 828 -767Group of 20 -8 895 8 787 -93
Table A2. Additional gains/losses from eliminating export subsidiessimulated with the Armington version
Source: ATPSM calculations.
38
Equation system in the standard version
After a trade policy change, like a change in tariffs, export subsidies and/or domesticsupport, is specified, the model calculates the new equilibrium. The equation system for all countrieshas four equations:
, , , , ,1
ˆ ˆ ˆ1) ;J
i r i i r C i j r Ci jjj i
D P Pη η=≠
= +∑
, , , , ,1
ˆ ˆ ˆ2) ;J
i r i i r P i j r Pi jjj i
S P Pε ε=≠
= +∑
, , ,3) ;i r i r i rX Sγ∆ = ∆
, , , , , ,ˆˆ4) ;i r i r i r i r i r i rM D D S S X∆ = − +∆
5) ;0)(1
=∆−∆∑=
N
nnn MX
where D, S, X, and M denote demand, supply, exports and imports, respectively;^ denotes relative changes and D absolute changes;Pw denotes world price;tc denotes the domestic consumption tariff and tp denotes the domestic
production tariff;ε denotes supply elasticity, h denotes demand elasticity, and the ratio of
exports to production;i and j are commodities indexes;r is a country index; andN is the number of countries.
Equations 1 and 2 specify that the new demand and supply are determined by the price changes,trade policy changes and the corresponding elasticities and cross-price elasticities. Equation 3requires that the change in exports in each market is some proportion of the change in production.This proportion is determined by the ratio of exports to production. Equation 4 clears the market,so that production plus imports equals domestic consumption and exports. Equation 5 ensuresthat, globally, the sum of the change in exports equals the total change in imports for eachcommodity.
39
UNCTAD Study Series on
POLICY ISSUES IN INTERNATIONAL TRADEAND COMMODITIES
No. 1 Erich Supper, Is there effectively a level playing field for developing countryexports?, 2001, 138 p. Sales No. E.00.II.D.22.
No. 2 Arvind Panagariya, E-commerce, WTO and developing countries, 2000, 24 p.Sales No. E.00.II.D.23.
No. 3 Joseph Francois, Assessing the results of general equilibrium studies of multi-lateral trade negotiations, 2000, 26 p. Sales No. E.00.II.D.24.
No. 4 John Whalley, What can the developing countries infer from the UruguayRound models for future negotiations?, 2000, 29 p. Sales No. E.00.II.D.25.
No. 5 Susan Teltscher, Tariffs, taxes and electronic commerce: Revenue implicationsfor developing countries, 2000, 57 p. Sales No. E.00.II.D.36.
No. 6 Bijit Bora, Peter J. Lloyd, Mari Pangestu, Industrial policy and the WTO, 2000,47 p. Sales No. E.00.II.D.26.
No. 7 Emilio J. Medina-Smith, Is the export-led growth hypothesis valid for develop-ing countries? A case study of Costa Rica, 2001, 49 p. Sales No. E.01.II.D.8.
No. 8 Christopher Findlay, Service sector reform and development strategies: Issuesand research priorities, 2001, 24 p. Sales No. E.01.II.D.7.
No. 9 Inge Nora Neufeld, Anti-dumping and countervailing procedures – Use orabuse? Implications for developing countries, 2001, 33 p. Sales No. E.01.II.D.6.
No. 10 Robert Scollay, Regional trade agreements and developing countries: The caseof the Pacific Islands’ proposed free trade agreement, 2001, 45 p. Sales No.E.01.II.D.16.
No. 11 Robert Scollay and John Gilbert, An integrated approach to agricultural tradeand development issues: Exploring the welfare and distribution issues, 2001,43 p. Sales No. E.01.II.D.15.
No. 12 Marc Bacchetta and Bijit Bora, Post-Uruguay round market access barriersfor industrial products, 2001, 50 p. Sales No. E.01.II.D.23.
No. 13 Bijit Bora and Inge Nora Neufeld, Tariffs and the East Asian financial crisis,2001, 30 p. Sales No. E.01.II.D.27.
40
No. 14 Bijit Bora, Lucian Cernat, Alessandro Turrini, Duty and quota-free access forLDCs: Further evidence from CGE modelling, 2002, 130 p. Sales No.E.01.II.D.22.
No. 15 Bijit Bora, John Gilbert, Robert Scollay, Assessing regional trading arrange-ments in the Asia-Pacific, 2001, 29 p. Sales No. E.01.II.D.21.
No. 16 Lucian Cernat, Assessing regional trade arrangements: Are South-South RTAsmore trade diverting?, 2001, 24 p. Sales No. E.01.II.D.32.
No. 17 Bijit Bora, Trade related investment measures and the WTO: 1995-2001, 2002.
No. 18 Bijit Bora, Aki Kuwahara, Sam Laird, Quantification of non-tariff measures,2002, 42 p. Sales No. E.02.II.D.8.
No. 19 Greg McGuire, Trade in services – Market access opportunities and the ben-efits of liberalization for developing economies, 2002, 45 p. Sales No. E.02.II.D.9.
No. 20 Alessandro Turrini, International trade and labour market performance: Ma-jor findings and open questions, 2002, 30 p. Sales No. E.02.II.D.10.
No. 21 Lucian Cernat, Assessing south-south regional integration: Same issues, manymetrics, 2003, 32 p. Sales No. E.02.II.D.11.
No. 22 Kym Anderson, Agriculture, trade reform and poverty reduction: Implica-tions for Sub-Saharan Africa, 2004, 30 p. Sales No. E.04.II.D.5.
No. 23 Ralf Peters and David Vanzetti, Shifting sands: Searching for a compromise inthe WTO negotiations on agriculture, 2004, 46 p. Sales No. E.04.II.D.4.
No. 24 Ralf Peters and David Vanzetti, User manual and handbook on AgriculturalTrade Policy Simulation Model (ATPSM), 2004, 45 p. Sales No. E.04.II.D.3.
No. 25 Khalil Rahman, Crawling out of snake pit: Special and differential treatmentand post-Cancun imperatives, 2004.
No. 26 Marco Fugazza, Export performance and its determinants: Supply and de-mand constraints, 2004, 57 p. Sales No. E.04.II.D.20.
No. 27 Luis Abugattas, Swimming in the spaghetti bowl: Challenges for developingcountries under the “New Regionalism”, 2004, 30 p. Sales No. E.04.II.D.38.
No. 28 David Vanzetti, Greg McGuire and Prabowo, Trade policy at the crossroads –The Indonesian story, 2005, 40 p. Sales No. E.04.II.D.40.
No. 29 Simonetta Zarrilli, International trade in GMOs and GM products: Nationaland multilateral legal frameworks, 2005, 57 p. Sales No. E.04.II.D.41.
41
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No. 30 Sam Laird, David Vanzetti and Santiago Fernández de Córdoba, Smoke and mir-rors: Making sense of the WTO industrial tariff negotiations, 2006, Sales No.E.05.II.D.16.
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No. 32 Ralf Peters, Roadblock to reform: The persistence of agricultural export sub-sidies, 2006, 43 p. Sales No. E.05.II.D.18.
QUESTIONNAIRE
UNCTAD Study Series onPOLICY ISSUES IN INTERNATIONAL TRADE
AND COMMODITIES(Study series no. 32: Roadblock to Reform: The Persistence of Agricultural Export Subsidies)
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